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Was SEBI Tight-lipped: Exigent need to regulate the Regulator

The author is Jass Kaur Bindra, a third year student at Hidayatullah National Law University.


The recent issue of the Adani debacle has created commotion & tumult in the capital market. Pursuant to the release of the Hindenburg Report, the stocks of Adani drastically plunged thereby creating a stock mayhem. As a result of this development primarily, Credit Suisse and Citigroup Inc. are now refusing to accept Adani’s bonds and securities as collateral. National Stock Exchange (NSE) has also placed the Adani entities under Additional Surveillance Measures (ASM). A moot question that arises in this context is “Where was the Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) while the securities market was faced with an overnight wreck?”. The lackadaisical approach of the nation’s premier regulatory body of the securities market points to the existence of inefficiency and lack of accountability on its part. SEBI governs and regulates the financial market, but there does not seem to be any sort of regulation or supervision over SEBI, which can set its accountability or responsibility for its inactions or even ill actions. Was SEBI unaware of the alleged stock manipulations and fraudulent practices carried out by Adani group for the last 2 years or was it aware and was deliberately overlooking them? This article shall attempt to delve deeper into these questions.

Adani fiasco: Where was SEBI throughout?

The Adani’s wreck isn’t something which transpired in a couple of days. The irregularities could be traced back to 2021. When the entire world was battling the Covid-19 blues, the Adani stocks geared by 3000%. There was a smell of rat, but SEBI at the best was lethargic or at worst overlooked the irregularities.

The regulator has failed to comply with the requirements of Regulation 23 (2), (4), (9) of SEBI (LODR) Regulations, 2015. As per Regulation 23, if a public listed company engages in a related-party transaction then such transaction needs to be approved by an audit committee of the listed entity comprising of only independent directors, then by the shareholders and finally, the listed entity has to disclose the fact of said related party transaction to the stock exchange. However, despite the fact that the 7 listed entities of Adani entered into more than 6000 related party transactions without complying with the requirements of Regulation 23, no heed was paid by SEBI to this. As such, there wasn’t any imposition of liability inclusive of penalties and fines by SEBI for contravention of regulation as per Regulation 98 (1) of SEBI (LODR) Regulations, 2015. Ajay Tyagi, Former Chairman of SEBI, remarked that the “Use of complicated group structures and complex related-party transactions increase the concern on siphoning of funds, money laundering, round tripping”.

The SEBI Act, 1992, Section 11 (2) (e) imposes a duty on part of the Board to prohibit unfair and fraudulent trade practices in the capital market. Section 11 (1) (i) of the Act and Regulation 6 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 gives powers of investigation to SEBI. Regulation 4 (2) (a), (d), (e) of SEBI Regulations, 2003 prohibits manipulative trade practices inclusive of artificially inflating and causing fluctuation in the prices of stocks. Despite the fact that SEBI had statutory and regulatory duties to take cognisance of this matter, SEBI was tight-lipped. It did not investigate the allegations against the conglomerate for engaging in stock manipulation and unfair trade practices. The Mauritius corporate registry database shows how the conglomerate by having a hand-in-glove with their close associates have set-up numerous shell entities in Mauritius, Cyprus, Caribbean islands that have negligible or no corporate functioning. These entities helped in creating artificial inflation in Adani’s stock prices.

In the leading case of Sahara India Real Estate Corporation v. SEBI it was laid down that the functions mentioned in Section 11 of the SEBI Act, 1992 have statutory force and they are not mere departmental instructions. The case leaves no doubt that Section 11 is statutorily binding in nature and it is not a discretionary power that can be exercised only when SEBI desires to do so. Further, Gujarat High Court in SEBI v. Ajay Agarwal mentioned that the interpretation of Section 11 shall be such that it supports the aim of statute instead of eschewing it. Therefore, Section 11, based on the above verdicts, can be said to be a provision that imposes a statutory duty on the regulatory authority to enforce principles of fair corporate dealing enshrined in the statute (specifically those laid down under Section 11).

SEBI holds a binding obligation to ensure that a minimum of 25% of the shareholding in public companies’ rests with the general public. At maximum the promoters of a listed company can only hold 75% of the shareholdings of the company. Any contravention of this provision shall lead to the delisting of the company. But the promoters of the conglomerate were directly holding approximately 74% shareholdings & indirectly holding the remaining shareholdings in a clandestine manner through its shell companies in tax haven countries. This constitutes a violation of Regulation 19 (2)(b)(i) of Securities Contracts (Regulation) Rules, 1957. SEBI had the power to impose penalties for the violation, but it continued to stay silent despite being seized of the matter.

Plausible remedy against Unaccountable Regulator

It can lucidly be concluded from the above discussion that SEBI has failed to regulate the capital market in accordance with the 1992 Act and the concerned regulations. It kept turning a blind eye to the practices of the conglomerate. So, is there any statutory remedy available against SEBI for its inactions?

In India there isn’t any statutory mechanism which keeps a check on the acts and omissions of SEBI. This stands as an inordinate lacuna of the SEBI Act, 1992 and related rules and regulations. Currently the only viable remedy to make the regulator accountable is by way of a writ petition to be filed before the High Court and the Supreme Court. The Telangana High Court in Animish Pradip Raje v. SEBI quashed the order of SEBI and directed it to constitute an audit committee in accordance with SEBI rules and regulations in accordance with the rule, regulation. From both cases it can be derived that currently the only plausible remedy against the ill-actions or inactions of a regulator like SEBI lies only with constitutional courts, as the statute offers no help in this regard.

Recommendations: Bringing Voice to Voiceless Statute

These instances remind us that for a fair and a robust regulation of the financial markets, it is a sine qua non to have a statutory mechanism which keeps a check over ill-actions and inactions of SEBI. In India, it’s need of the hour to bring voice to voiceless statute i.e. SEBI Act, 1992 and its related regulations.

India can adopt and incorporate the statutory mechanism similar to as one followed in UK, to ensure accountability of SEBI. In UK, the Financial Conduct Authority (FCA) regulates the capital market under the Financial Services and Markets Act, 2000 (FSMA). Part 6 of FSMA, 2000 has a mechanism of ‘Complaint Commissioner’ which keeps a check over working of FCA. It makes FCA accountable for its ill acts or omissions. Similarly, in the US, the Securities Exchange Commission under Section 14 & Section 15 of the Securities Exchange Act of 1934 is held accountable by the compliance officer. Moreover, the US follows mechanism of ‘Investors Complaint Form’ to maintain an eye over the working of its regulator. These are some plausible recommendations that can be adopted in Indian laws so as to breed accountability on part of SEBI.

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